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Spotlight on China as new Emissions Trading System is set to revamp the global market

China is set to launch the biggest Emissions Trading System (ETS) in the world this year and Liwei Chen, China Director, The Climate Group, reflects on the challenges and opportunities in this blog.

Emissions Trading Systems are sometimes seen as complex policy tools that can constrain markets. On the contrary, they are a proven and cost-efficient method of reducing greenhouse gas (GHG) emissions while allowing economies to prosper.

In fact, putting a price on carbon provides a framework to make polluters pay for the strain they are putting on society, while rewarding forward-thinking business leaders who are steering towards a cleaner, more just economy.

CHINA’S NATIONAL ETS

China is once again at the forefront of climate action, and is addressing the challenges and opportunities associated with combatting climate change. This year, the country will launch its own ETS, set to be the largest in the world. This will mean that ETSs will be operating in economies that account for about half of the world’s GDP, covering more than 15% of global emissions, according to a recent report published by the International Carbon Action Partnership (ICAP).

China has set ambitious climate goals, fixed in its Nationally Determined Contribution to the historic Paris Agreement, and its ETS will play a crucial role in transitioning from commitment to implementation.

The launch of the new ETS has been eagerly anticipated around the world, after seven pilots were run over three years in China’s biggest cities – accounting for 68.6 megatons of CO2, with a total value of US$160 million (CNY1.1 billion).

Image: ETS for greenhouse gas emissions in force, scheduled or under consideration around the world – from the ICAP Status Report 2017

While the success of these pilots is encouraging, it is true that launching a national ETS for a country so big in terms of geography, economy and bureaucracy is clearly a challenge. The good news is that the National Development and Reform Commission (NDRC) is up for this challenge.

In fact, the Commission has already submitted a draft ETS Regulation to the State Council, and is also working on rules that will allow greater transparency on reporting and verification of the emissions. As part of this effort, the NDRC is also collecting historic emissions data from hundreds of companies – to have a clear, verified starting point for the upcoming national ETS.

The NDRC is also planning to establish a national registry and trading platforms for the ETS, and is also working on the “cap” for the emissions that must be set at provincial level – so a coherent national cap can be established.

ETSs provide a framework to set a limit for carbon emissions – that is lowered over time – and companies can “trade” their allowance with other businesses. In this way, companies can re-invest this profit to continue lowering their emissions, generating an effective spiral of innovation and R&D.

EXCITING DEVELOPMENTS

For the first three years, the initial phase of China’s ETS will allow the regulator to identify and solve issues that arise from such a complex system, before it will be extended and fully implemented from 2020. It is a fantastic sign that emerging economies, which will play a critical role in the net-zero emissions economy of the future, are transforming their energy systems while reducing emissions and fostering economic growth, thanks to ETS.

In the meantime, ETSs around the world are continuing to boom – especially in Asia and Latin America. In particular, Mexico is well underway: in 2014 it signed a Memorandum of Understanding (MoU) with the State of California, and in 2015 another MoU was signed with Québec – both members of The Climate Group’s States & Regions Alliance– to tackle climate change also thanks to ETS.

Mexico reiterated this commitment in 2016 at the Climate Summit of the Americas, when it issued a joined declaration with the Canadian provinces of Ontario and Québec – an example of how the North American members of our States & Regions Alliance are advancing bold climate policies through collaboration.

And international collaboration is key in solving the global issue of climate change. We at The Climate Group work with these leading sub-national governments to demonstrate to the world how policies such as ETS are already proven – and are good for both citizens and companies.

A fantastic example of this is the Under2 Coalition, of which The Climate Group acts as Secretariat, that brings together 167 jurisdictions, representing more than one billion people and US$25.9 trillion in combined GDP, committed to taking ambitious action to limit the increase in global average temperatures to below 2 degrees Celsius.

CHALLENGES AND OPPORTUNITIES

At the same time, it is important to recognize the existing gap between expectations and delivery of the world’s ETSs – in particular the issue of the low prices for the allowances in some markets, such as the European one. The price of the EU ETS, in the last 7 years, has dramatically fallen from US$ 29.7 (EUR 28) to less than US$ 5.3 (EUR 5). This low price is not encouraging investment in clean technologies – one of the main goals of the ETS – and it must be reformed to match the political climate ambition of Europe.

While these challenges remain, we must emphasize that by the end of 2016, ETSs worldwide had generated close to US$30 billion in public revenue. This is a significant amount that is being invested in climate change mitigation, innovation and market transformation.

With the launch of the new ETS this year, China is ready to grasp these opportunities. The Climate Group will continue to foster international collaboration to the transition towards net-zero emissions, economic growth and a prosperous future for all.